For many businesses, outstanding sales—or the length of time it takes clients to pay their invoices—can significantly impact cash flow. Managing this effectively can unlock capital that can be reinvested in the business, boost financial stability, and create growth opportunities.
In this guide, we’ll explore practical steps business owners can take to reduce their sales outstanding and streamline cash flow management.
What Is Sales Outstanding and Why Does It Matter?
Sales outstanding, often called Days Sales Outstanding (DSO), measures the average number of days it takes for a company to collect revenue from its credit sales. A high DSO can signal cash flow problems, while a low DSO suggests that a company is efficient in collecting payments. Businesses can reduce financial strain and improve their operational efficiency by improving DSO.
Step 1: Streamline Your Invoicing Process
A key factor in improving outstanding sales is a smooth and efficient invoicing system. Some businesses suffer delays because invoices aren’t sent promptly or lack clarity. To improve your invoicing process:
- Send invoices immediately after services or products are delivered.
- Ensure invoices are clear, detailing due dates, payment methods, and any penalties for late payments.
- Implement a cloud-based invoicing system to automate sending reminders for overdue payments.
Step 2: Offer Multiple Payment Options
One of the simplest ways to encourage faster payments is by offering flexible payment methods. Some customers delay payments because their preferred method isn’t available. By offering a variety of payment options, you can make the process easier for clients:
- Include credit card payments, ACH transfers, and digital payment platforms like PayPal or Stripe.
- Set up recurring billing for clients with ongoing services to ensure timely payments.
Step 3: Incentivize Early Payments
Offer incentives to clients who pay ahead of the due date. This can be a small discount or reward for early payment. The advantage is twofold: it encourages customers to prioritize your payment over others and improves your cash flow faster. Some common ways to incentivize early payments include:
- Offering a 2-3% discount for payments made within ten days.
- Setting up a loyalty program where customers earn rewards or points for consistent, early payments.
Step 4: Set Up Clear Payment Terms
Confusion over payment terms is one of the most common reasons for delayed payments. Make sure your payment terms are explicit and agreed upon before beginning work. Key components of payment terms include:
- Due dates (e.g., payment due in 30 days).
- Late payment penalties (e.g., interest rates applied after a specific period).
- Clear terms of service outlining the consequences of non-payment.
Step 5: Regularly Monitor and Follow Up on Invoices
Tracking outstanding invoices is essential for reducing DSO. Set up a regular schedule to monitor who has paid and who hasn’t. Automation tools can help by sending reminders and keeping track of overdue invoices. Here are some ways to follow up:
- Set up automated reminders at key intervals (e.g., seven days before due, on the due date, and seven days after).
- Personalize follow-up emails to maintain professionalism and customer relationships.
- If necessary, consider outsourcing collections for long-overdue payments.
Step 6: Build Strong Customer Relationships
Customer relationships can directly affect how quickly you get paid. Clients who value your business relationship are more likely to prioritize your invoices. Strengthen relationships by:
- Regularly communicating with clients about their satisfaction.
- Offering great customer service to foster trust and loyalty.
- Provide flexibility when necessary but hold firm to agreed payment terms.
Step 7: Use Financial Metrics to Track Progress
Improving your DSO requires continuous tracking and adjustment. Measure your DSO regularly and make improvements where necessary. Additionally, you can use other metrics such as:
- Percentage of overdue invoices.
- Average collection period.
- Payment trends from clients over time.
Understanding these metrics can help you proactively manage your cash flow and make strategic decisions about extending credit to clients.
Conclusion
Improving sales outstanding is essential for maintaining healthy cash flow in your business. Streamlining your invoicing process, offering flexible payment options, and strengthening customer relationships can reduce your DSO and build a more financially stable business.